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Date: 6 March 2007

Cargo Symposium, Mexico

It is a pleasure to address such an impressive audience. Over 800 experts from all parts of the air cargo and mail supply chain.

  • Airlines
  • Forwarders
  • Shippers
  • Postal operators
  • Customs 
  • Government
  • And suppliers

Air cargo is a US$55 billion business, 12% of industry revenues. But more importantly our role in the global economy is critical. 35% of the value of goods traded internationally fly on our aircraft. Together we make over US$3 trillion of business possible. A survey of companies in 5 countries attributed 25% of sales to effective air links. Moreover

  • 80% said production efficiency required quality air service
  • 70% said it helped them access economies of scale 
  • and 56% said it helped reduce costs

Air cargo is at the heart of the global economy. And it is also a very relevant part of an airline industry that is changing fast. Since 2001 in Europe and North America, crew unit costs dropped 20 to 30%, maintenance costs dropped 30% and distribution costs were also reduced by 30%. US$40 billion in losses were a strong case for change. Losses in 2006 were an estimated US$500 million.

So what do we face in 2007? More challenges! The revenue cycle has peaked, revenues grew 8% in 2006. We expect 4.5% this year. Oil prices dropped, but are still close to US$60/barrel, three times the price in 2001. And it is still 26% of our costs. The bill this year will be US$120 billion.

And there are three cargo trends we have to be very aware of

  1. The concentration of growth in Asia
  2. A increasing trade imbalance
  3. And losing business to sea shipping

1. Asian Growth
Air cargo growth is linked to Asia. By 2010 Intra-Asia freight will be 8.3 million tonnes, 26% of total international freight. Another 6 million tonnes will come on routes from Asia to Europe and North America. China will be at the core, representing 30% of the growth in freight traffic. Great news—but there are concerns. Limited gateways in China could cause bottlenecks. China’s huge market size could give advantages to niche players. Particularly point-to-point start-ups. And doing business in China itself can be challenging. It is first in growth, but 93rd in World Bank rankings for ‘ease of doing business’. The opportunities in Asia are enormous, but they will not necessarily be easy.

2. Trade imbalance
The other side of Asia’s amazing growth, is a trade imbalance. Asia is exporting more than it is importing. So the planes are full leaving Asia, but half empty coming in. And the situation will become more acute as airlines add capacity to meet the outbound demand. We all know what over-capacity does to our bottom line.

3. Losing business to sea shipping
Finally, ocean container shipping is becoming more competitive and taking business away. From 2000-2005 ocean container freight grew by 9.5%. More than double the growth in air cargo. IATA forecasts air freight will grow by 5.3% a year from 2006-2010. Ocean freight will increase by 7.2%. New container ships are faster and cheaper to operate. 2006 ocean container freight rates were 20% in real terms below 2000 levels. Air freight rates were only 8% lower. And ocean freight capacity is growing at 12% a year. So we can expect more intense price competition.

 

The Bottom Line

The good news is that the bottom line is finally the right colour. We expect a small profit of US$2.5 billion. But that is only a 0.5% return on revenue. To cover the cost of capital, airlines need a 7 to 8% return. So enormous challenges remain. And the answer is efficiency, efficiency and more efficiency. There are four items on the menu for change

  • Safety
  • Security
  • E-freight
  • And the environment

 

Safety

Let’s start with safety, our number one priority. 2006 was our safest year ever. The industry hull loss rate was 0.65 accidents per million flights. IATA members were even better at 0.48. We should be proud of our tremendous achievement. And we are committed to do even better.  The target is for a further 25% improvement by 2008. To achieve this target, cargo must improve its safety performance. It is 4% of global operations. But 23% of accidents.

I have heard the excuses, night flights, single pilot operations, charter operations. They are just excuses. Most cargo accidents are not related to the loading or mishandling of shipments, but to aircraft and flying conditions, similar to passenger aircraft accidents. We must find solutions that bring cargo’s performance in line with passenger. Safety Management Systems have an important role to play. Preventing accidents before they occur. But we need your commitment. Cargo carriers have been too slow in taking this up.

IATA’s Operational Safety Audit (IOSA) is also playing a big role. Cargo standards were developed last year. And all IATA airlines—cargo included—must complete an audit by the end of this year. Complying with global standards is the most efficient means to improve. And if carriers do not comply, they are out of IATA. We are a quality association—serious about our commitment to safety. I terminated the membership of 6 carriers that did not make the first deadline. But the goal is to raise the bar on safety—not reduce our membership.

I am committed through our Partnership for Safety to helping as many of our members meet the tough targets as possible. Particularly in Africa and Russia where the cargo safety record is the worst. But to be successful I need the commitment of our industry leaders. That means you—in this room. The deadline to complete an audit is less than 9 months away. 2 member cargo carriers have been IOSA audited. The remaining 17 carriers have already fully committed to being audited by year-end. We need to set targets to move the industry forward. And our greatest satisfaction will be to have all of our members on board.

 

Security

Security is parallel to safety as a priority. Governments have a duty to oversee both. There is no need to re-invent the wheel to be effective. We are the safest mode of transport because of global standards. Governments need to apply the same principles to cargo security. Unfortunately, I see more fragmentation than harmonisation. This adds cost and reduces effectiveness. Why are governments not harmonising?

First, regulators often don’t understand our industry, and approach cargo security in the same way as checked baggage.

Second, most don’t understand how the supply chain works. They focus on security at the end of the chain, not throughout the process.

Third, governments are not talking to each other. So they don’t have mutual recognition of standards, controls and programmes. And definitions, requirements and enforcement are inconsistent.

Finally governments are not using technology effectively. Particularly screening technology. They are quick to mandate expensive bulk x-ray equipment. But are not making full use of the potential for canine techniques. The result is a costly mess.

Look at the US proposals for 100% screening of cargo on passenger flights in three years. To be blunt….this is not smart, but it is expensive. The cost to the industry could be US$3.6 billion over 10 years. But 100% screening does not take into account risk. And focuses on the end of the chain—the last resort. The foiled London terror plot last summer demonstrated that intelligence is our best weapon. We are acting quickly to remind governments of this—alongside the

  • ATA (Air Transport Association of America)
  • AfA (Airforwarders Association)
  • HTSC (High Tech Shippers Coalition)
  • US Chamber of Commerce
  • CAA (Cargo Airline Association) and IATA 

We all want a secure industry. And the global economy relies on the efficient flow of goods. So we must explain ourselves better to regulators. I am pleased that with FIATA we are forming an Air Cargo Security Action Group. It will be a joint effort with clear goals: To develop, promote and protect the integrity of supply chain security, while ensuring cargo gets to destination in a timely manner. And to remind governments that we are serious partners…who are serious about security. Together we must take a smart approach.

 

e-freight

Along with being smart, we must also be efficient. That’s why IATA reengineered our US$20 billion CASS operations. To use more efficient processes. And provide online access via CASSlink. We are also growing the number of CASS offices to generate economies of scale. Last year we opened 12. And we plan up to 8 new CASSs for this year. Including Central and Eastern Europe, India, East Africa and Colombia. Most importantly we are on target to deliver impressive cost savings. A 22% reduction in CASS unit rates by 2008 compared to 2004.

You will be also aware of our Simplifying the Business programme. The aim is to drive down industry costs by US$6.5 billion. I hope that most of you arrived here with e-tickets. An important part of the programme. We will be at 100% e-ticketing by the end of the year. And that is US$3 billion in savings. e-freight will contribute another US$1.2 billion in savings. When it is fully implemented. At first we under-estimated the challenge. It is like doing ET and e-passports at the same time. For passengers that cannot talk or walk!

But we are determined. E-freight will help us improve our competitive position with shipping. And make it easier to do business worldwide—including China. And it is time to change. Our processes are 30 years old. Can you imagine working without internet access or e-mail? Faxes were not even around at that time! And our cargo processes have not changed a bit. So how do we move e-freight forward?

Our approach is to lay a solid foundation with an effective industry action group, of six top cargo carriers, the WCO and Freight Forward International. The group is aligned with the EU and United Nations’ global e-trade initiatives. We must stay ahead of the curve—creating solutions that work for our industry. So standards, processes, and documents have been developed. The next challenge is implementation with three main components

  1. Pilots
  2. A Message Improvement Programme
  3. And promoting wider engagement

1. Pilot Projects
In December we successfully signed up 5 locations for pilot projects

  • Canada
  • Hong Kong
  • UK
  • Netherlands and
  • Singapore

E-freight needs the right business, technical, and legal environment to operate. In each of these locations the governments are committed to supporting e-freight. The key carriers are committed

  • Air Canada Cargo
  • Cathay Pacific Cargo
  • British Airways World Cargo
  • KLM Cargo
  • and Singapore Airlines Cargo

And the freight forwarders have signed up

  • DHL
  • Shenker
  • Kuehne & Nagel
  • Panalpina and
  • ABX

The goal is to have five successful projects running by the end of the year. So that we can demonstrate the benefits. And have a proven set of standards for other countries to follow. This will require a great team effort. We have made a great start with key players on board. And I am confident that we will have a great success to celebrate next year.

2. Message Improvement Programme
In parallel, we have a big problem to solve. Today 75% of electronic data that accompanies shipments is incorrect or missing. EDI as it is today cannot support e-freight. We must improve the quality and reach of EDI for the airwaybill and house manifest. Cargo 2000 will play a pivotal role. e-freight focuses on process simplicity and efficiency, while Cargo 2000 focuses on process quality and control. Message Improvement will become an integral part of Cargo 2000. And e-freight processes defined during the pilots will be aligned with the Cargo 2000 recommended practices and will enable effective cargo security.

3. Wider Engagement
Make no mistake. e-freight is the future. We are working closely with the Universal Postal Union to bring mail operations on board. And we have a growing list of locations supporting e-freight initiatives

  • Korea
  • Chinese Taipei
  • Sweden
  • Mauritius and
  • New Zealand

These will drive the second-wave for paper free cargo by 2010

 

Environment

Finally, we need to look at the issue of environment. Some of you may say that it is a passenger issue. It’s an industry issue—and it includes cargo. Consumers are starting to evaluate carbon emissions generated to transport fruits, vegetables and flowers—a big part of the cargo business. And remember that the average age of the all cargo fleet is 25 years. So it is less fuel efficient than the passenger fleet. Which, on average, is 13 years. And if governments limit growth or impose emissions trading schemes. The measures will impact the growth of air cargo.

Our industry can be proud of our responsible approach to the environment. In the last 4 decades emissions per passenger kilometre dropped 70%. Fuel efficiency improved 10% in the last 4 years. And the billions airlines are investing in more fuel efficient aircraft will deliver a further 25% improvement by 2020. IATA is helping limit our impact on the environment by working with governments to

  • Shorten routes
  • Improve operational procedures and
  • Spread best practices

In 2006 our efforts saved up to 15 million tonnes of CO2. This is part of our very clear strategy to address the role of aviation in climate change. First, get the best out of new aircraft and engine technology. Second, eliminate the 12% inefficiency in global air traffic management. That wastes 73 million tonnes of CO2 a year. And adds US$13.5 billion to the fuel bill. Third, convince politicians that emissions trading is a better option than taxes or charges. Last month the ICAO CAEP process delivered the technical foundation for guidance on emissions trading. We must follow this through at the Assembly in September. And urge governments—like Europe—not to jump the gun with unilateral actions.

But that alone is not enough. Politicians are using environment as an excuse to milk our industry. To fill holes in their budgets. With no impact on the environment. Gordon Brown added a billion pounds to the UK’s bank account by doubling air passenger duty in February. I wrote a strong letter asking the Chancellor how many trees he will plant with this new revenue. He could not answer. But the Dutch government followed his lead. Taking EUR 350 million for an environmental tax. The list is growing. So alongside technical solutions effective communications is essential.

IATA with ATAG is launching an industry campaign. To remind governments that we are responsible for 2% of manmade CO2—but 8% of the global economy. To communicate what we are  doing to limit our contribution. And to highlight measures that governments are failing to take. Like the failure of the EC to implement an effective Single European Sky. You will see the first efforts in an ad campaign that we will be running with our members. And I urge all the cargo community to join in. The future growth of our industry is worth fighting for.

 

Conclusion

Cargo is a critical part of the air transport industry. And we have come along way over the past 6 years. This is a wonderful industry. We have made the global village a reality. Bringing people to business and goods to markets. And we provide employment opportunities that support nearly US$3 trillion in global economic activity. We should be proud of our achievements. But not complacent about our future. The challenges that we face are real and imminent. And IATA is taking a leadership role in critical areas of change.

Together with our members and partners. We are improving safety and security. We are climbing out of the technology-dark ages. And moving forward with e-freight. And we are pushing governments for effective solutions to environmental issues. To achieve our goals, we must work as a team. And we must move fast.  With your support, I am sure that we will be successful.

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